Subsidy reform shores up Ahmadinejad’s rule

After months of false starts, dire warnings and political wrangling, Iran has embarked on a sweeping program of cuts in its costly and inefficient system of subsidies on fuel and other essential goods.

The subsidies have put a strain on state finances and held back economic progress for years.

The government’s success in overcoming political obstacles to make the cuts and its willingness to risk social upheaval suggest that President
Mahmoud Ahmadinejad
may have consolidated power after the internal fractures that followed his bitterly disputed re-election in 2009.

Some analysts believe this could influence Iran’s position at nuclear talks in Istanbul this month.

“The initial success of the subsidy reform will increase the regime’s confidence generally," said Cliff Kupchan, a former US State Department official who is now a director at the Washington-based Eurasia Group. “This could make them more assertive in the talks. But more importantly, a confident and unified regime is better positioned to reach consensus on some initial agreement."

Iran’s foreign exchange revenue sank in recent years as oil prices fell from pre-recession highs, creating greater budget pressure. But Tehran has long sought to cut the subsidies, particularly those for oil.

The logic is compelling: artificially low prices encourage greater consumption, leaving less oil to export for cash. And the higher oil prices rise, the greater the “opportunity costs" in lost exports. But the timing, whether for political or economic reasons, was never right to cut the subsidies.

Although the government may be feeling economic pressure, analysts say, the cuts are a sign of its political strength, having beaten the opposition that sprang up after the 2009 elections and stared down its traditional conservative wing, which has challenged Mr Ahmadinejad’s authority.